Have we learnt anything this week which would warrant one having more doubt about the strength of upturn in the NZ  economy? At the margin yes as a result of weak jobs and foreign trade data in the United States and downbeat  comments from the Federal Reserve.

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• Tony Alexander Comments
• If I Were a Borrower What Would I Do?
• If I Were a Term Deposit Investor What Would I Do?
• Exchange Rates & Foreign Economies
• Previous Economic Comments

Tony Alexander Comments
These developments have helped place some extra downward pressure on risky  assets like the NZD, as well as long term borrowing costs with the result that sitting on floating still looks like a good bet  for a bit longer – though we still favour jumping into fixed at some point. The hard part is picking exactly when. That in fact  s the essential characteristic of the recovery in our own economy and those overseas.

There is massive uncertainty  about the strength and longevity of the recovery because none of us have a model telling us what usually happens when  the world just scrapes past a Depression scenario. At some point householders will decide the time is safe enough again to start borrowing and spending. We don’t know when. At some stage businesses will decide the climate is safe  enough to borrow and/or raise new capital to finance not just potentially temporary hiring but long payoff investment in  plant and machinery. But we don’t know when. At some stage investors will decide the environment is safe enough to  start doing more than just buying shares to back their hopes. They will actively seek out direct equity opportunities. But  we don’t know when.

We also don’t know how sensitive consumers and householders are with regard to interest rates. Few are willing to  borrow, but if that unwillingness reflects caution rather than cash flow concerns then the level of interest rates becomes  almost irrelevant. That means that the RB can get away with raising interest rates a bit further without major concerns  about restraining growth because the determinant of whether businesses and consumers borrow and spend will be  general sentiment rather than cash flow considerations.

On top of these major structural uncertainties we have the usual  unpredictability of the exchange rate, the low predictability of commodity prices (supply shocks tend to be unpredictable  and sometimes large as is happening with wheat currently), plus uncertainty about the extent of the turnaround in  migration flows. Then it gets worse. As we have previously noted data relating to household spending for the remainder  of this year is going to be messed around by uncertainty surrounding what we do ahead of the October 1 GST rise and  what we do after.

The upshot of all this uncertainty is that anyone making personal financial and business decisions on the basis of economic forecasts needs to be extremely careful currently.

If I Were a Borrower What Would I Do?
You win some and you lose some. Only four weeks after switching from saying I’d stay floating (had that view for many  months) to saying I would take advantage of an unexpected fall in fixed rates to fix 2-3 years, those fixed rates have fallen  gain. The gap between floating and fixing following the fixed rate falls and the extra 0.25% on floating rates makes  he jump even easier now for those contemplating fixing.

The Total Money Floating rate is now 6.09% and the two year  fixed rate 6.85%. But the chances of the Reserve Bank pausing in their tightening cycle have definitely increased and  that means one can probably stay floating for a while longer before hopping into fixed because those fixed rates could  even fall a tad further in the near future.

If I Were a Term Deposit Investor What Would I Do?
Same as before. Most short but some placed longer to pick up some extra yield.

Exchange Rates & Foreign Economies
Worried World Lowers NZD - As we have pointed out for a long time now the fluctuations in the Kiwi dollar in recent  onths have been driven almost entirely by unpredictable changes in global risk tolerance and that has proved the case over the past week. Courtesy of worries about the US economy the NZD has fallen to end just over US 71 cents this  afternoon from 73 cents last week. We are unchanged against the AUD, Euro and Pound, but down against the Yen as a  result of investors moving funds out of USDs into Yen.

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Previous Economic Comment
BNZ Weekly Overview 26 July 2010 >>